March 13, 2023

What is happening with SVB?

Here at Ramp, we know this is a uniquely stressful time for Silicon Valley Bank (SVB) depositors nationwide. We are supporting impacted customers and business owners in a variety of ways.

The situation with SVB unfolded at lightning speed so if you've been wondering how things got to the present state of affairs, here's our current understanding. As with any new and evolving situation, circumstances might change over time.

Background on SVB

Silicon Valley Bank has been an institution in California & beyond for the last 40 years. As startups raised more and more funding every year, they’ve thrived, acquiring over $175B in deposits from top-tier venture firms and world-renowned startups alike. SVB customers included Andreessen Horowitz, Roblox, Roku, Etsy, and tens of thousands of businesses across the country. As the nation’s 16th largest commercial bank with over 6,000 employees, it claims to have provided banking services to nearly half of all venture-backed technology and life science companies.

Over the last couple of years, SVB made several acquisitions, including Leerink Holdings in November 2018 and Boston Private Financial Holdings in July 2021. The future of these institutions will be implicitly tied to SVB’s future, despite the fact they started as separate entities and were later acquired by SVB.

What went wrong with SVB? What caused SVB to collapse?

Over the past few years, SVB invested their deposits in a variety of long duration bonds, including 10-year mortgage-backed securities, worth around $90 billion. From a risk perspective, these bonds were considered very safe and highly-rated. SVB bought these bonds and securities back in 2021, when interest rates were incredibly low, yielding an average of 1.79%. While this is a low yield, it was relatively uncontroversial  at the time, given the low-interest rate environment. Despite the safety of these securities, this created an asset liability duration mismatch, and still left SVB “illiquid,” meaning that if a majority of their depositors tried to take out their money simultaneously, SVB wouldn't have enough cash to fulfill those withdrawals since they were invested in such long-dated assets.

As the funding market dried up over the past year, more and more depositors made withdrawals to stay liquid to pay off their rising expenses. At the same time, the Federal Reserve was increasing interest rates, meaning SVB’s securities which yielded just 1.79% experienced significant mark to market losses. General rule of thumb: for every 1% increase in interest rates, a 10-year duration bond loses about 10% of its market value. With Fed Funds rising more than 4% over the last year, many fixed income securities of this nature lost a significant amount of value. 

To remain liquid, SVB put ~$20 billion worth of their securities for sale (AFS or ‘Available for Sale’). Due to the devaluation of the securities held, SVB took a ~$1.8B loss through this sale (a 9% loss), which raised concerns amongst depositors. If SVB was willing to lose nearly $2 billion just to stay liquid, how bad are their circumstances? 

To make up for this gap, Silicon Valley Bank began an effort to raise $2 billion via sales of common equity and preferred convertible stock from potential buyers such as General Atlantic and others in the middle of last week. 

Unfortunately, this share sale created a panic among depositors and investors and many companies attempted to pull their deposits out over the course of the week, creating a classic "bank run.”

Scrambling to find capital to fill the $1.8 billion gap and maintain liquidity so that depositors could move their cash out, the FDIC took over and placed SVB under its receivership, officially forcing SVB to shut down. The FDIC mentioned that it would attempt to liquidate SVB assets and recoup funds uninsured depositors through future dividend payments. 

The Silicon Valley Bank collapse represents the largest bank failure since the 2008 economic collapse, where 25 banks failed after the stock crash, including Washington Mutual, which had $300 billion in assets.

Will SVB re-open? 

On Sunday night, in a joint statement by the Federal Reserve, the Treasury, and the FDIC, it was announced that all depositors would have access to all of their funds, significantly reducing panic and potential contagion risk. As of Monday morning, it appears that Silicon Valley Bank is back up and running for most users. Early reports indicate that payroll, ACH, and wire payments from Friday and Monday are being processed as usual.

What happens to shareholders of SVB?

For insured depositors (those up to $250k in holdings), SVB is fully operational. Uninsured depositors have been told they will receive future dividend payments to make them whole, and as of today, March 13th, the FDIC and President Biden reaffirmed that depositors would be protected and have access to their money. 

As for the shareholders and debt holders of SVB, only time will tell. Asset sales will occur in the coming days and weeks (including securities, start up loans, loans backed by wineries, etc), managed by the receiver. Earlier today, it was announced that HSBC acquired SVB UK. Depending on the ultimate pricing of these asset sales, there may be recovery value for SVB debt or equity investors.

Further reading

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VP of Finance & Capital Markets, Ramp

Alex Song is the Head of Finance and Capital Markets at Ramp. Prior to joining Ramp in 2020, he spent more than a decade as a private credit and structured credit investor in the hedge fund industry, working at firms including Sculptor Capital Management, Crayhill Capital Management, Bain Capital, and Morgan Stanley. Alex holds two degrees from Stanford, in Biomechanical Engineering and in Economics. He also holds a Master of Business Administration from Harvard Business School. Alex is a CFA charterholder.

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